Have you ever gone through the awful process of getting through an airport online to get to finally find your terminal and learn your plane has been overbooked? Thankfully, most of us haven’t. I’m flying in a week or so and hope to also avoid this problem.

But it happens. These airlines will book a 150 seat plane for as many as 225 seats. That means as many as 75 people will not get to take the flight they expected. As a result, the airlines are forced to set up travelers in hotel, issue vouchers, and suffer a customer service disaster. This hardly sounds like a money making proposition, so why do Airlines overbook flights?

Like any question in business, the answer is always: because they make more money this way. It’s hard to imagine how one can make more money when stuff goes wrong due to the overbooking. But if these customer service disasters only happy 1% of the time and the rest of the time it’s mostly dandy then you’ve got a good business proposition.

When you buy plane tickets, you probably buy a seat at a certain time going to a certain place on a certain plane. But some business travelers just reserve 2 or 3 seats over the course of a day or two. This way in case the business they’re conducting runs longer than expected they don’t have to worry about missing a flight. As a result, the plane is flying now with empty seats. Empty seats = lost money. So the airlines will book more seats than the plan has on the expectation that some will not show up.

This is a safe bet. People cancel flights, get to the airport too late, act sketchy and get pulled away by the TSA for an underwear check, or something else. It’s amazing that overbookings happen as infrequently as they do considering these odds.

Well not really. The airlines use sophisticated software to estimate the exact number of people will miss their flight (for whatever reason). The software is of course proprietary, because whoever has the best algorithm makes the most money. But some of the inputs into these things would be the number of people flying for business and pleasure, where they’re going, the current weather that day, the time of the flight (surprise! People oversleep and miss flights!), even the odds of the plane breaking down. When a plane breaks down on the runway and they don’t have an exact replacement then the airline must fly another plane that is either bigger, or in many cases, smaller.

So is the practice of overbooking bad for consumers? When things go wrong you get screwed and miss your flight because of the greedy monkeys in suits. But when things go right and the plane makes money for 300 tickets on a flight that can only carry 250 the net effect on ticket prices is a subsidization. That’s right, those folks that don’t show up for their flight are actually saving you money. You’ll never notice this because the price on your ticket doesn’t change. That is because the overbooking subsidization is already priced into the ticket.

Finding information about why airlines overbook is hard. It’s without a doubt a trade secret exactly how and why this is done. Each airline would do it differently, and it’s possible that some don’t bother at all. It may seem counter-intuitive to airlines that rake in money this way, but since the airline industry is still an unprofitable money hole, it might be wise to rethink even the strategies that make money.

Photo: joiseyshowaa

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice.

categories: business